Mineral rights investors in Texas can acquire mineral rights interests by either buying them outright or leasing them. The upshot to leasing mineral rights is that you are shielded from the risks of a large capital investment while benefiting from the proceeds of oil, gas and NGL production on the lease. The downside to leasing is that there is a chance that you could receive no payment if oil or gas is not found, payments are low because the operator is holding the lease by production, and lease payments will decline over time. A less commonly used alternative to leasing or immediately buying mineral rights in Texas is to option the right to buy, which allows you to exercise that option within a specified time.
Buying mineral rights in Texas can be a complex undertaking influenced by multiple market forces. The price of oil, gas and natural gas liquids (NGL) will always influence the value of mineral rights, making timing the most critical factor of buying mineral rights in Texas at the best multiple. The following are just a few other market forces to consider.
Right now, there are large pools of capital actively investing in mineral rights in Texas to gain exposure to world class basins like the Permian, including mineral funds, trusts, hedge funds, venture capital firms, master limited partnerships and family offices. Add to these buckets of cash government agencies, pension funds, sovereign wealth funds and a large pool of individual mineral rights buyers. If you are buying mineral rights in Texas, be aware of the fierce competition that the Houston Chronicle likened to a knife fight in the Permian. But opportunities do abound for buying mineral rights across Texas if you can prepare competitive offers.
Many oil and gas operators also hold extensive non-operated working interests, often owning mineral rights in more wells than they actually operate. E&Ps also consolidate acreage to streamline operations, given that the cost of debt for E&Ps is cheaper and more available. If you are buying mineral rights in Texas, take advantage of E&Ps thirst for expansion by partnering with operators to acquire mineral rights in their areas of interest, broker and flip acquisitions.
A crucial factor to consider when buying mineral rights in Texas is midstream takeaway capacity for oil, natural gas, NGL and produced water. Areas of new development and remote locations increase the lifting costs for producers because transportation costs are higher absent robust gathering and pipeline infrastructure. If you are buying mineral rights in Texas, understanding the midstream pipeline takeaway capacity in your areas of interest will help you pinpoint bottlenecks and opportunities to get in on acquisitions before valuations increase from midstream build out.
Natural gas is an increasingly attractive investment for mineral rights buyers. Primarily serving local markets and less impacted by global price swings like oil, natural gas prices are relatively stable. Natural gas is also a vital component of the new energy mix as Texas navigates the energy transition, adding wind to the sail of prices. Factor this trend into your decision to buy in pure gas plays like the Barnett or Haynesville Shales or areas of the Permian where natural gas has been flared pending midstream pipeline takeaway capacity improvements.
The following checklist provides step by step information to help you avoid risks and acquire the best mineral rights for your needs.
There are many risks associated with buying mineral rights. A basic understanding of a well’s life cycle can help you avoid investment pitfalls, such as buying interest in a closely spaced unconventional Eagle Ford well whose production will decline sharply in the first year or paying a three-times multiple for an older east Texas stripper well that might be plugged in one year.
Want to buy Texas mineral rights ahead of drilling projects? Consider investing in non-producing mineral interests or acquire producing minerals through royalty interests, overriding, or non-participating royalty interests.
Understanding the unique production potential, geology and market for buying minerals in a specific Texas region can help you pinpoint opportunities faster. Get familiar with an area of interest, such as the myriad Permian sub-basins, Eagle Ford, Barnett and Haynesville Shale.
There are multiple outlets where sellers list their mineral rights, including auction sites and online brokers. Look for services that offer choice and transparency.
A common rule of thumb for mineral investors is to estimate asset value by multiplying how much the owner received over the last year by a certain multiple (for example, three or four times annual income). Buyers who want to be competitive should also consider location and asset quality in their offer, which can vary widely across Texas basins.
The most crucial step in buying mineral rights in Texas is researching what you intend to buy, including historical well performance and production from nearby wells. Verify that the owner has the rights to sell and ensure that the lease does not contain “held by production” clauses that would allow the operator to produce very little just to hold the lease.
The most crucial step in buying mineral rights in Texas is researching what you intend to buy, including historical well performance and production from nearby wells. Verify that the owner has the rights to sell and ensure that the lease does not contain “held by production” clauses that would allow the operator to produce very little just to hold the lease.
If the seller used a broker, the necessary conveyance and deed will be filed with the appropriate Texas county courthouse and operator. Importantly, expect the operator to send you a revised Division of Interest for signature before you will receive payments on your mineral rights.
Buying and building a portfolio of mineral interests requires careful management of land records and revenue statements. Be sure to store these in a digital folder for quick reference and auditing purposes. Texas mineral buyers can benefit from purpose-built mineral rights management solutions to track land and legal records.
If you are buying mineral rights in Texas, specifically mineral and/or royalty interests, be aware that you are assuming the burden of maintaining and negotiating leases with oil and gas operators. In contrast, overriding royalty interests, non-participating royalty interests and wellbore interests do not, but these revenue streams end when leases expire in Texas.
Need assistance with your mineral rights acquisition strategy? Enverus is here to help you succeed with industry-leading mineral management software, robust oil and gas datasets, and a deep bench of mineral management experts.
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